Accepting private equity investment a whirlwind, but also can be healthy change

In the competitive white-knuckled world of small business enterprise, where mission-critical events can threaten a company's very survival on a daily basis, there remains a short list of seminal decisions that stand out above the rest.

Aside from launching the company and terminating the company, perhaps the next most important decision for a business owner is agreeing to accept outside investment from a private equity firm.

The decision to engage private equity investors is significant because it runs counter to so many other decisions that have come before and have defined the company up to this point.

For starters — and perhaps most importantly — partnering with private equity investors fundamentally changes the control structure of the company. In this transaction, the founder will typically concede complete or majority ownership to investors, in exchange for a sizeable cash payout and a stake in the newly structured company.

The challenge for business owners is that once this transaction is complete, for the first time in the life of the company, the founder will no longer have a controlling interest in their own business. While this decision may have been made “for all the right reasons,” and clearly represents the best strategic choice from an intellectual perspective, there is no getting around the emotional issues that must be addressed and reconciled if this transition is to be successful.

The fact is, having a strong emotional reaction to conceding control is an appropriate and even healthy response, as it demonstrates just how passionate and committed an entrepreneur is to his or her company. Lingering emotional attachment is further proof of this reality.

Experienced private equity investors have grown to expect this kind of reaction, and the savvy ones have begun structuring their agreements to capitalize on it. By creating incentives for the entrepreneur to remain emotionally engaged in growing and expanding the company, private equity firms are able to retain the valuable leadership, momentum and drive of the original founder (even though their holdings have been reduced to that of a minority owner), and create a true win-win for both stakeholders.

In addition to the financial mechanics of transitioning control, the decision to proceed with private equity investment also touches on several other less obvious considerations.

For example, for many “Type A” entrepreneurs, the decision to accept the assistance of outside investment could feel like a crutch, like they are admitting defeat, or failure, or conceding that they simply couldn't do it on their own. Obviously this is not the case, but for hard-charging entrepreneurs it's easy to understand where these feelings might originate.

Entreprenuers who successfully navigate the complex process and emotional whirlwind associated with private equity investment are the ones who take the time to evaluate all of the pros and cons, and ultimately make a pragmatically informed decision with their eyes wide open. Rather than denying the mental and emotional issues that come with a decision of this magnitude, they embrace all of its ramifications and choose to frame the decision — the “win” — on their terms.

For many, this means exchanging control of their company for control of their life, a situation enabled by the injection of a forgotten luxury called “free time,” made possible by the addition of partners and strategic hires brought in to help shoulder the management load. And for most, it means returning to their first love, remembering the reason they went into business in the first place, and rediscovering the simple joy of doing that one thing that makes work feel like play.